1.7 Organization, Roles, and Responsibilities

Types of business organization, and how large businesses structure leadership and specialized departments.

Part 1 of 4 Four Legal Structures

A handshake before kickoff turned two workers into partners. Twenty minutes later a parent asked who buys the screen if a cooler lid closes on a phone. The two partners had agreed how to divide the profits and had not agreed who answers for the debts.

The four structures

Structure	Owners	Who answers for debts	Funding and growth
Sole proprietorship	One	The owner, personally	Savings and loans; limited
Partnership	Two or more, sharing decisions and profits	The partners, personally	Savings and loans; limited
LLC	One or more, and control stays with them	The company; owners can avoid personal liability	Still limited
Corporation	Shareholders, with an elected board of directors	The company, a legal person in its own right	Sells shares; far more room to grow

Two trade-offs separate the four structures. Keep control and keep the profits, and you accept less funding. Hand control to shareholders and a board, and you gain capital. In return, the company itself controls the profits.

Part 2 of 4 One Owner, Five Posts

A sole proprietor fills five posts at once: chief executive officer, marketer, product developer, financial manager and operations manager. On one Saturday, the owner chooses the season's direction, shares the menu, adds fruit after feedback, counts the cash, and loads the coolers in time for the handoff.

Partners fill the same five posts and usually split the posts by strength and interest. The cousin takes the coolers and the routes, and the founder keeps the product, the price and the money.

One owner does not have enough hours for all five posts, so a growing owner looks for help.

Part 3 of 4 Growing Into Departments

Size and complexity need more people with narrower skills, so work gets grouped into specialized departments. Executives such as a CEO answer for overall vision, strategy, operations and performance. Managers run departments and report to the executives. In a corporation, the executives report to the board and the shareholders. The whole arrangement of roles, authority and reporting is the organizational structure.

An organizational chart: shareholders and the board at the top, the chief executive below them, and six departments below the chief executive: sales and marketing, research and development, operations, accounting, finance and human resources. — A department builds expertise in one area, which is what lets a large firm serve customers well.

The six departments

Department	What it does
Sales and marketing	Market research, sales strategy, brands, customer relationships
Research and development	Improves existing goods, services and processes, and invents new ones
Operations	The technical work of making the product and getting it to customers
Accounting	Records spending and earnings and prepares the financial statements
Finance	Raises and manages money, and uses the numbers to recommend what to do next
Human resources	Recruits, trains and evaluates the people the other five depend on

Part 4 of 4 Outsourcing

Outsourcing is paying another business to do a function instead of doing it in-house, normally for efficiency or cost. Two triggers recur: nobody on staff has the skill, or in-house labor is expensive. When the group chat can no longer handle the pre-orders and neither partner writes code, the partners pay a neighbor's older child to build the ordering page.

Paying for the skill was a better use of money and time than spending a season learning the skill. Comparing those two options is the outsourcing decision.

Worked Examples

Outsource or build the ordering page

Compare the cost of buying a function against the cost of performing it internally.

A small food business needs an online ordering page. A developer quotes four hundred fifty dollars to build it plus twelve dollars a month for hosting. Building it internally would take the owner sixty hours, and an hour of the owner's time is worth eighteen dollars because that is what she earns doing paid work instead. Hosting costs the same either way. Compare the two routes over the first year.

Developer's one-off fee: $450
Hosting: $12 per month
Owner hours required to build it internally: 60
Value of one hour of the owner's time: $18
Time horizon: 12 months

1. Cost the outsourced route
Four hundred fifty dollars once, plus twelve dollars a month for twelve months, which is one hundred forty-four dollars of hosting.
$outsourced cost = fee + (monthly hosting \times months)$
2. Cost the internal route
Sixty hours at eighteen dollars an hour is one thousand eighty dollars of the owner's time, plus the same one hundred forty-four dollars of hosting.
$internal cost = (hours \times hourly value) + hosting$
3. Compare the two totals
One thousand two hundred twenty-four dollars minus five hundred ninety-four dollars leaves six hundred thirty dollars in favor of outsourcing, and the sixty hours return to the owner as well.

Check answer

Answer
Outsourcing is $630 cheaper in year one. The outsourced route costs five hundred ninety-four dollars against one thousand two hundred twenty-four dollars internally, a difference of six hundred thirty dollars plus sixty hours of owner time.

Why it matters
The course gives two triggers for outsourcing: the business lacks employees with the specific skill, or internal labor costs run high. Both appear here, and the owner's time has a real price even though no invoice is issued for it.

Key Terms

Practice Questions

6 questions. Nothing here is recorded or scored.

Question 11.7.A.3, 1.7.A.1
Tumble Route
Aiko Mori and Jordan Lee started Tumble Route, a laundry pickup and delivery service, with a spoken agreement and no legal filings. Aiko manages the routes, the machines, and the daily schedule, while Jordan handles pricing, advertising, and the accounts, a split they chose because it matches what each does best. Last month a customer's designer jacket was ruined in a machine, and the customer is demanding eight hundred dollars. The partners are now weighing two changes: reorganizing as a limited liability company, or incorporating so they can sell shares to fund twenty new delivery vans.
Which of the following best describes the partners' current legal situation regarding the ruined jacket?
- A.Only Aiko is liable, since the machines are her responsibility.
- B.Only the business is liable, since it made the customer agreement.
- C.Neither partner is liable until the business incorporates.
- D.Both partners are personally liable for the claim.
Check answerHide answer
Answer: D
A.
Divides liability by job duties, and the law does no such thing for a partnership: the internal split of roles decides who does the work and changes nothing about who owes the debts.
B.
Describes the protection an LLC or a corporation provides, where the owners avoid personal liability because the debts belong to the business, and that protection is exactly what Tumble Route has skipped building.
C.
Liability does not wait for paperwork. With no legal filings, the business is a partnership by default, and in a partnership the owners are personally liable now, not after some future incorporation.
D.
Correct. Tumble Route is a partnership, and partners are personally liable for all business debts and obligations, so the eight hundred dollar claim can reach both partners' personal money regardless of whose task went wrong.
Question 21.7.B.2
Aiko running operations while Jordan handles pricing and accounts best illustrates which of the following?
- A.Partners dividing responsibilities by their individual strengths.
- B.The formation of specialized departments in a business.
- C.Outsourcing two business functions to another firm.
- D.A transfer of ownership from one partner to another.
Check answerHide answer
Answer: A
A.
Correct. Partners carry full responsibility for the business together and typically divide the roles by strengths and interests, which is precisely the routes-versus-accounts split described.
B.
Departments are how large businesses organize many employees with specific skills into functional teams, and two owners splitting hats is the small-business version of the same instinct without any departments existing yet. Scale is the tell: two partners divide roles, and a large staff organizes into departments.
C.
Outsourcing hands a function to another business, and both of these workloads stay inside Tumble Route, split between its two owners.
D.
No ownership moved anywhere. Both partners still own the business; what they divided is the work, not the stake.
Question 31.7.A.4
If the partners incorporate to fund the twenty new vans, which of the following best describes the tradeoff they accept?
- A.They keep full control of decisions while gaining new funding.
- B.They become personally liable for a larger share of the debts.
- C.They cede control to shareholders in exchange for funding.
- D.They give up the ability to earn profit from the business.
Check answerHide answer
Answer: C
A.
Promises the funding without the price, and the structures do trade against each other: control and funding pull in opposite directions across the four types.
B.
Inverts the liability rule, because incorporating shrinks personal exposure, with the corporation itself becoming the liable party.
C.
Correct. A corporation typically gains greater access to funding, and the price is control: owners cede decision-making power to shareholders and an elected board, and the company itself controls the profits and carries the liability.
D.
Owners of a corporation keep earning from the business as shareholders, through their shares of its profits. What they give up is unilateral control, not the ability to profit.
Question 41.7.D.4, 1.7.D.5
A department at a mid-size company tracks the year's expenditures and earnings and prepares the financial statements that management reviews each quarter. Which of the following best identifies the department described?
- A.Finance, which secures and manages funds.
- B.Accounting, which tracks and reports money.
- C.Operations, which runs production processes.
- D.Research and development, which improves products.
Check answerHide answer
Answer: B
A.
The swap pair for this topic. Finance secures and manages funds and uses financial data to recommend strategies going forward. Records look backward, funding looks forward: a department preparing statements about money that already moved is accounting, even when a scenario sprinkles the word financial everywhere.
B.
Correct. Accounting tracks expenditures and earnings and prepares financial statements to monitor the financial health of the business, and the question restates that job almost word for word.
C.
Operations manages the technical processes that produce and deliver what the business sells. Tracking expenditures and preparing statements is record-keeping about money, which belongs to accounting.
D.
Research and development innovates around new and existing goods, services, and processes. Nothing in the description involves products at all; it describes financial record-keeping.
Question 51.7.A.1, 1.7.A.3, 1.7.A.4
Three businesses are described as follows. Business A: one owner, who is personally liable for business debts, funded by savings and a bank loan. Business B: four owners called members, who are not personally liable, and the business cannot issue stock. Business C: about three thousand shareholders, a board of directors, funded partly by issuing shares. Which of the following correctly identifies businesses A, B, and C, in that order?
- A.Sole proprietorship, then LLC, then corporation.
- B.Partnership, then LLC, then corporation.
- C.LLC, then partnership, then corporation.
- D.Sole proprietorship, then partnership, then corporation.
Check answerHide answer
Answer: A
A.
Correct. Business A has one owner with personal liability, the signature of a sole proprietorship. Business B has owners called members with a liability shield and no stock, which is the LLC pattern exactly. Business C has shareholders, a board, and share funding, the corporate trio.
B.
The first row is the tell: a partnership requires two or more owners, and business A has one, so the whole option dies on a single word. Read every row against every feature, because these identification questions hide the decisive detail in the least glamorous line.
C.
Business A has one owner who is personally liable, which is a sole proprietorship, not an LLC; an LLC's defining feature is that its members escape personal liability. Business B, not A, fits the LLC pattern.
D.
Four owners sounds like a partnership, and two details in the description settle it otherwise: the owners are called members, and they are not personally liable. Partners in a partnership carry personal liability for the business's debts, so business B is an LLC.
Question 61.7.C.4
A software company hires an outside firm to run its customer-support phone lines because support wages in its city are unusually high. Which of the following best describes this decision?
- A.The company has made support one of its core competencies.
- B.The company has turned support staff into internal stakeholders.
- C.The company is outsourcing a function to lower its costs.
- D.The company has reorganized itself as a corporation.
Check answerHide answer
Answer: C
A.
Points the concept backward. Core competencies are capabilities a business develops itself, because they help it outperform rivals. Handing a function to an outside firm is the opposite move: the company has decided support is a cost to manage, so the function moves outside.
B.
The outside firm's staff work for the outside firm, not for the software company, so they are not internal stakeholders of the company at all. Outsourcing moves work out; it does not move workers in.
C.
Correct. Outsourcing means hiring another business to handle a function, and the two classic triggers are missing skills and high labor costs. Unusually high support wages are the second trigger verbatim.
D.
Hiring a vendor changes nothing about legal structure. Reorganizing as a corporation is an ownership decision, and no ownership, liability, or funding change appears in the scenario.

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7 Common Mistakes on 1.7

The wrong moves students actually make on these questions, why each one is wrong, and what to do instead. Part of the practice tier.

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CED Codes

1.7.A.1 · 1.7.A.2 · 1.7.A.3 · 1.7.A.4 · 1.7.B.1 · 1.7.B.2 · 1.7.C.1 · 1.7.C.2 · 1.7.C.3 · 1.7.C.4 · 1.7.D.1 · 1.7.D.2 · 1.7.D.3 · 1.7.D.4 · 1.7.D.5 · 1.7.D.6